It started when babies in China were sickened. It spread rapidly making thousands more ill. The culprit was quickly identified: residue from melamine, a highly toxic chemical that was finding its way into dairy and non-dairy cream products made in China and used by others as an ingredient in their products. The scare caused Cadbury, Britain’s largest chocolate manufacturer, to recall 11 products.

The melamine scare was only the latest in a number of concerns about products manufactured in China. Last year, it was pet food and toothpaste imported from China that set off alarms in the U.S. Yet, American manufacturers continue to outsource business to China because labor there is far cheaper than in the U.S.

The nation’s retailers are still very willing to sell products manufactured in China, but there is a catch. They require the companies responsible to have appropriate amounts of product liability insurance. Target, Wal-Mart, Kmart, McDonald’s and others will put products manufactured in China on their shelves as long as their manufacturers and importers have adequate coverage.

The problem for importers is that standard lines insurers are often fearful of potentially defective products—even if the risk may be small or miniscule. When fearful, they tend to decline coverage, and scares like melamine in China make them even more leery.

That’s where wholesale brokers and specialty lines markets come into the picture, often insuring items that others will not for whatever reason. Excess and surplus lines companies are able to offer specialty lines coverage largely because they are free of rate and form restrictions imposed on other insurance carriers. Because of this freedom, they are able to react to changes in the market and design a policy that meets the needs of both the insurer and the insured.

Finding the Best Match

Sounds simple. Can’t get standard lines insurance for a client’s product manufactured overseas or in a category that has been recently recalled, find a member of the specialty lines community that will take it. But finding the right carrier in the specialty lines community is not that easy. It takes skill, knowledge and experience.

This is where wholesale brokers can be of tremendous assistance. Wholesale brokers have a vast knowledge of E&S carriers and experience working with many of them. Thus, wholesale brokers can help match customers to the right carriers. How valuable are wholesale brokers? Well, companies like Markel work almost exclusively through them.

Ask Nan Meyer, product line leader for Markel. She finds a great deal of value in the business that comes our way through wholesale brokers. She particularly likes that the business is prescreened, and she knows the application for insurance will be complete before it reaches her desk or anyone else’s.

“For Markel, it’s easier because we are getting business that has already been vetted,” she says. “The wholesaler is not going to pass on a submission that says simply ‘machine parts’ or ‘herbals.’ Before he contacts us, he is going to know exactly what machine part or what herbal it is that needs to be insured, how it is being used in the product, etc. He just does a far better job of screening applications for proper information so that, once we get the risk, we know exactly where to go to place it.”

We have found that professional wholesale brokers provide complete information, and as a result we have few questions, if any, because the wholesaler has already asked them. We may have one or two more, but they are usually minor or a further clarification of something in the application. As underwriters, we really appreciate that all the legwork has been done for us so we can concentrate on writing the risk rather than determining whether it is for us.

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Having done this for so long and having worked with a number of different markets, wholesale brokers know almost immediately when they get a submission which market is right. Depending on the situation, the wholesaler may talk to a few different companies about the risk and potential coverage, but it’s most likely they have the most appropriate one in mind from the start. More often than not, they are right. They don’t waste anyone’s time sending requests to underwriters who would have little or no interest.

That’s an efficient way to do business, explains Tim Turner, president of CRC Insurance Services, a leading wholesale brokerage. “When you’re the problem solver and your agent has the need for your expertise, quickly knowing where to market a risk is critical. Of the 15 or 20 markets you may have access to, only two or three may have both the appetite for the risk and the coverage that meets your client’s needs. An experienced professional wholesaler translates into taking what might be a weeklong or more process for the retail agent and turning around a solution in 24 hours.”

Deep Market Knowledge

Wholesale brokers also know well that price is not always the primary issue when placing business with a carrier even in this trying economy.

“Sometimes it’s about the coverage itself and the claims handling experience and the particular expertise of the company you are placing it with,” Meyer says.

Say, as a retail agent, you were asked to find a policy for a food product that was misclassified as a nutraceutical. It comes up for internal review or perhaps reinsurance review. During the review process, the company that accepted the risk discovers that over-the-counter nutraceuticals are not something that it writes. Since you, the retail agent, are not as familiar with the unique distinction of when a food product is actually a nutraceutical, you now need to find the right fit for your client.

Here is where wholesale broker specialists bring enormous value. Because of their knowledge of the unique niche and appetite of E&S insurers, they are able, in short order, to know exactly what company to approach immediately. Such expertise serves a specialty customer’s need for coverage, provides the underwriter a precise view of the types of risk they are prepared to write, and gives the retail agent the convenience of approaching one contact to get a market view of the best options for a difficult exposure.

That’s why, as Meyer says, our wholesale agents are so valuable to us as a company. “Because wholesale brokers focus and specialize every day on the unusual and hard-to-place, they save the client, the agent and our company time and money.” Their experience results in the knowledge of who to go to for quick response with unique accounts, difficult business and new emerging exposures.

Negotiating Terms

The wholesale broker also will help negotiate terms for the retailer and the insured, trying to provide options through the quoting process. Here’s a good example: A wholesaler who places some of the toughest accounts with Markel had a client who imported clothing and helmets made in China. The client had no trouble getting product liability insurance for the clothing as it posed little, if any, risk. But the helmets were another story. Protective headgear comes with much higher exposure, and most standard lines won’t touch it. This wholesaler knew we would write the business under the right terms and conditions. Together, we were able to negotiate a program structure as well as a premium that was satisfactory to all involved.

Wholesale brokers also are able in some cases to identify and carve out exclusions that would make the risk more acceptable to a carrier. Nutraceutical products that contain the weight-loss supplement bitter orange are a good example. In 2004, the U.S. Food and Drug Administration was questioning bitter orange after a number of people said they became ill from ingesting it. It was around the time that the FDA had banned weight-loss supplements containing ephedra, which had been used in China for 5,000 years.

We were approached by a wholesale broker seeking coverage enhancements for a supplement manufacturer whose product contained bitter orange. The wholesale broker supplied Markel with the package labels, the dosage, the ingredients and the instructions for using the product. They approached us knowing that with this information we would be able to potentially include coverage for that oftentimes excluded ingredient.

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Specialty lines business is much less commoditized than standard lines. For exposures that are unusual or esoteric, there are no industry published rates. There are no statistically credible rates. To a large extent, that makes underwriting specialty lines part science and part art. The science is the historical results, and typically that’s the smaller part because there often aren’t statistics available. With so much art to it, it takes wholesale brokers to best place the risk with the appropriate underwriter.

Stable Markets

Does that make these exposures riskier to write? Not at all. In fact, A.M. Best Co. has performed an annual survey of the specialty lines market every year since 1994, and each time it has found that its solvency record is as good as, if not better than, the overall industry.

Retailers understand this. In January 2008, the National Association of Professional Surplus Lines Offices surveyed retail agents and brokers on their opinions of working with wholesale brokers. It found the agents and brokers looked favorably upon working together and appreciated the access the wholesale brokers provide to markets. In addition, the survey found that the wholesale brokers were highly regarded for their experience, expertise and knowledge.

Some retail agents may prefer to go directly to the carriers themselves, and of course, it is their choice and that of the carrier. But it is rare that they are saving themselves much, if anything, by doing so. The old cliché “time is money” is at work here. Imagine how long it could take for the retail agent to find the appropriate underwriter or terms that would work if he’s not familiar with the business. Wholesale brokers are going to know what to do because they have likely seen it before. And if they haven’t, they have a good idea where to start.

Capacity is plentiful in a soft market, and it puts pressure on E&S carriers, wholesale brokers and others. But does this affect the role of the wholesale broker? Not really. Their expertise and experience have value in any market.

Springman is president and COO of Markel.